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November 30, 2000

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Asiaweek Time Asia Now Asiaweek story

OCTOBER 8, 1999 VOL. 25 NO. 40

Inside Krung Thai
A leaked summary of a confidential report on Thailand's second-largest bank causes heads to roll. Read on to find out what the audit really says

The developer of the 67-story RCK Tower has not been servicing its Krung Thai loans Dominic Faulder - Bureau Bangkok for Asiaweek
In the heart of Bangkok stands a Greco-Roman edifice. Seven years after work began on the 67-story RCK Tower, the commercial-and-condominium project is still unfinished. Although it is a small syringes-and-weapons group with no experience in large-scale property projects, the developer got a 10.9-billion-baht - $267 million at the current exchange rate - facility from state-controlled Krung Thai Bank. But it has not been repaying most of its loans for more than 10 months. In March 1998, the bank decreed that it would release more money only after the majority of the condominium units has been sold. Eighteen months on, RCK's developer has yet to conclude a deal.

The RCK Tower is among Bangkok's biggest white elephants - at 330,000 square meters, it boasts a floor area nearly equal that of Chicago's Sears Tower, the world's second-tallest office building. Citing an audit by PricewaterhouseCoopers (PWC), critics say it is also a prime example of how badly Krung Thai Bank, Thailand's second-largest bank, has been run. The international audit firm's findings were supposed to be confidential, but a summary was leaked in a Senate hearing in August. The ensuing scandal led to the sacking of Krung Thai chairman Mechai Viravaidya and his board - and gave the opposition a bludgeon to use against the government of Prime Minister Chuan Leekpai, who enjoys a "Mr. Clean" reputation.

Mechai Viravaidya on his resignation as chairman of the troubled Krung Thai

And how. "Mechai had to resign because the government wanted to silence him," charges Surasak Nananukul of the opposition New Aspiration Party. "It is absurd that the government is trying to prosecute a person who had revealed the truth, instead of tackling those who caused the problem." A non-banker better known for his promotion of condoms and other safe-sex practices, Mechai denies being the source of the leak. The government's foes accuse Finance Minister Tarrin Nimmanhaeminda of protecting his brother, Sirin Nimmanhaeminda, who ran Krung Thai at the time some of the doubtful loans were approved. Retorts Tarrin: "I believe in my brother's integrity."

The opposition is preparing a no-confidence motion against the finance minister in December. Minority shareholders of Krung Thai threaten to sue the bank for mismanagement. And foreign investors are dismayed. "They feel the Krung Thai Bank story is another hallmark of the government's incompetence in putting its financial house together," says a Bangkok-based foreign analyst. "The way the authorities are dealing with it is not helping at all. The culture has such a high resistance to going after influential interests." The worry is that the government may sacrifice transparency and reform to avoid prosecuting people close to it.

Lost in the emotional hue and cry are the actual contents of the PWC report. The press has zeroed in on a supposed finding, based on the Senate leak, that the level of Krung Thai's non-performing loans is 84% of total outstanding loans, not 59% as the bank says. In fact, say Asiaweek sources who have read the voluminous main report and its appendices, that 84% refers only to big corporate borrowers. Including small and medium-size enterprises and retail accounts, 66.5% of total debt has become non-performing. This is an extrapolation. PWC reviewed only 42% of Krung Thai's loan portfolio as of November 1998, represented by the top 100 largest borrowers, 40 randomly selected corporate clients, and 212 retail accounts.

The extrapolation was done to determine how much Krung Thai needed to set aside as loan provision. As of Nov. 30, 1998, the bank had allocated 61.2 billion baht - $1.5 billion - for the purpose, topped up in August by another $108 billion baht. PWC says at least 364.3 billion baht or $8.8 billion is needed, or ideally, 394.2 billion baht ($9.6 billion). These numbers are much higher than what has been set aside in part because they take into account the non-performing loans of First Bangkok City Bank, which has been absorbed by Krung Thai. The inclusion of First Bangkok's bad assets also partly explains why PWC's estimate of Krung Thai's non-performing loans is higher than the bank's own.

As part of the audit, PWC examined 10 files each from Krung Thai and First Bangkok City Bank. The sources say PWC unearthed deficiencies that it believes may indicate serious systemic problems in the two banks. The RCK Tower loan is a case in point. The developer has long been a Krung Thai client, first borrowing money for its syringe venture more than a decade ago. Between 1993 and 1994, the bank granted additional loan facilities to the group so it could buy RCK Tower. The project was actually a Krung Thai problem loan - the bank had lent to the original developer, who later defaulted after he was charged with trying to kill a Supreme Court judge. Financing the acquisition was seen as a way for Krung Thai to get back its money.

“The feeling is that Krung Thai is another hallmark of the government's incompetence in putting its financial house together”
According to the sources, PWC found that the bank only asked that a construction valuer look at what has been done to estimate the project's worth. It found no evidence that Krung Thai required risk-mitigation measures such as identification of anchor tenants. Changes in project design and inadequate funding delayed the work, but it seemed Krung Thai was not monitoring the project's progress. In another case, PWC found that Krung Thai lent some $136 million to a wood-processing company without fully checking its financial position. The bank also lent 75 million baht to the wife of the founder of the client company to buy land for a personal residence.

Chirayudh Vasuratna, the head of the Senate committee on economics and industry, says he has seen documents relating to this particular transaction. "If you want to buy land, you will probably get a loan equal to half its value and you would need to wait 60 days for your application to be approved," he says. "In this case, the wife of the gentleman told bank officials she was pregnant with twins and wanted to build a house for them. She applied for a loan equal to the full value of the land but does not put up any collateral. The loan was approved in three days. She fails to pay the interest and principal; the bank accepts promissory notes instead. Then her husband gets killed. One of her creditors discovered she owned the property and took it."

According to the sources, PWC took pains to point out that its conclusions about Krung Thai Bank's credit and other practices were necessarily tentative because of the limited sample. (Citing confidentiality issues, PWC declined to speak to Asiaweek about the report.) The auditors recommended a detailed examination of 100 more randomly selected accounts, a suggestion that Mechai and his board approved in July. But PWC could not begin work on the second audit because key bank personnel were not available and certain information could not be located. Then Mechai was forced to resign and a new board comprised mostly of former government bureaucrats took over.

The new board members, led by chairman Sivavong Changkasiri, a former permanent secretary for industry, have little banking experience. Krung Thai president Singh Tangtatswas told Asiaweek that bank executives were approached, "but most of them said they did not want to join us." Seen as close to Tarrin, Singh used to head the Stock Exchange of Thailand. He became Krung Thai president in June. "We intend to adhere to the restructuring plan which was approved by the Ministry of Finance and the Bank of Thailand earlier this year," he says. "The long-term objective remains unchanged: return the bank to operating profitability and proceed with privatization." Singh expects to sell Krung Thai's shares to the private sector within the next three years - although other bank officials tell Asiaweek that Tarrin has indefinitely postponed Krung Thai's privatization.

What about the pending PWC audit? "The second round will start shortly," says Singh. "We are still defining the terms, the scope as well as the timing." In the past, the president concedes, Krung Thai's loan processes were flawed - like those of many other Thai banks. "There were too few check and balances and the credit approval process was too narrowly focused on the assets of the debtor," says Singh. "But loan approvals [in Krung Thai] now require three signatures, two of them by persons with credit functions, and the third by the relationship manager. We are now using cash-flow-based lending." The president says Krung Thai will also set up before the end of the year an Asset Management Corp. that will take over many of the non-performing loans.

But the politicians are still baying for blood. Sen. Chirayudh, who has been critical of Tarrin's handling of the economy, faults Sirin for overzealousness in turning Krung Thai into a successful commercial bank. The rash of decisions, he claims, may make Sirin criminally liable for some dodgy transactions. (Former Krung Thai CEO Tamjai Khambato was jailed in 1995 for similar offenses; he received a royal pardon in 1996.) Sirin says he is ready for any investigation. Accusations fly about special banking deals for supporters of the ruling Democrats - Tarrin is a key party fundraiser - although such charges are routinely hurled at anyone in power, so closely are politics and business entwined in Thailand.

Tarrin is in damage-control mode, assuring the public that he would fully investigate Krung Thai's non-performing-loans. "The search for answers must be transparent and non-discriminatory," he says. The government says Mechai and his board were let go because of their inability to work with the authorities; this problem has been resolved with the appointment of a new board. Tarrin is also moving to place the bank directly under his ministry. As part of the rescue agreement with the International Monetary Fund, Krung Thai is being overseen by FIDF, a government agency created to help troubled financial institutions. Tarrin has told the IMF that Thailand no longer needs to draw from the Fund's $17.2-billion rescue facility.

Government spokesman Akapol Sorasuchart points out that Tarrin did not name Sirin to Krung Thai. "He had been there for a long time as a professional manager," says Akapol. "The fact that they are brothers makes it a little more interesting for the opposition to tell the story." Krung Thai's management has taken exception to some of PWC's preliminary findings, so Tarrin has formed an investigative committee. "If there is malpractice or negligence, it will be reported to the Finance Ministry, which will then press charges against everyone involved, including the brothers of finance ministers," says Akapol.

As for Mechai, the ousted Krung Thai chairman still heads state-owned Telephone Organization of Thailand, although some wonder whether his position might be under threat. "Krung Thai has a good future," he says. "The most important thing is the completion of PricewaterhouseCoopers' second audit." He also stresses the need for transparency. "Without it, you have a house with three posts," says Mechai. Tarrin says he wants transparency too. Let's see whether that is what Thailand - and potential investors - will get in the end.

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